New Programs Provide Funds for Street and Road Improvements

by Terrence Murphy

Terrence Murphy is program manager for California Statewide Communities Development Authority (California Communities). He can be reached at tmurphy@cacommunities.org. For more information about California Communities, visit www.cacommunities.org .

The deterioration of streets and highways is a critical issue facing California. The League of California Cities and California Communities (a joint powers authority) are developing financing programs to help cities leverage future payments for street and road improvements so the work can be done now -- before further deterioration occurs.

According to a report from TRIP, a national nonprofit transportation research group www.tripnet.org, 72 percent of the major roads in California are in mediocre or poor condition, requiring improvements to maintain their usability. The American Society of Civil Engineers agrees with this assessment and gives California’s roads a D+ grade in its California Infrastructure Report Card 2006 www.westerncity.com/reportcard. According to Surface Transportation Policy Project calculations, the backlog of pavement repair costs currently exceeds $10.5 billion. With more repairs needed than funds available, many agencies are forced to address urgent problems while deferring less critical projects.

Over time, the cost to repair a street dramatically increases as its condition degrades, with minor maintenance proj ects turning into major reconstruction projects. The surface quality of a newly paved road drops by 40 percent in the first 15 years, requiring minor repair to return it to good condition. After an additional six years, the quality will drop another 40 percent, and the cost of repair in year 21 will be more than five times that of year 15. Local agencies and taxpayers have to deal with the increasing costs of construction for delayed projects. Add to that the escalating construction costs in California and local officials may secure huge savings by funding street maintenance and improvement projects early.

A highly touted avenue for additional funding, Proposition 1B, has yet to provide the desperately needed funds promised by its passage in 2006. While local agencies look forward to receiving funds from Prop. 1B, the FY 2007-08 budget contains an appropriation of only $950 million for cities and counties, less than half of the amount authorized under Prop. 1B. The resources being provided for road maintenance need to be augmented with a new approach.

Two Solutions That Advance Future Payments

Through its partnership with California Communities, the League has developed two new programs for California local governments that will allow them to leverage current sources of funding to finance road improvement projects. The programs involve advancing gas tax payments or funds from Prop. 42.

A Gas Tax Solution. The use of proceeds from the gas excise tax, an 18-cent state excise tax collected on all gasoline, diesel and other fuel sales in California, is restricted to the maintenance and construction of public streets and highways (by Article XIX of the state Constitution). These funds are already distributed to cities and counties on a monthly basis, and this program would assist local agencies in bonding against future payments to obtain funding for more projects today. Bonds involving the advance payment of the gas tax have already been issued on a stand-alone basis, including state court validation, and the first pooled issuance from this program is expected to occur in spring 2008.

A Prop. 42 Solution. Approved by voters in 2002, Prop. 42 redirected the state’s portion of sales tax revenues on gasoline from the General Fund to transportation programs, including city streets and county roads. However, in FY 2007-08, cities and counties will not receive Prop. 42 funds, as this is the second of two "gap" years in which the funds are directed to state transportation programs. Moving forward, local agencies will begin receiving payments under Prop. 42 in FY 2008-09, thanks in large part to the passage of Prop. 1A in 2006, which restricted when and how often the state may divert these funds, including terms for paying back the borrowed monies. T he first pooled issuance under the Prop. 42 program is targeted for summer 2008.

Both the gas tax and the Prop. 42 programs are designed as pooled public offerings. Therefore, program participants will benefit from reduced issuance costs and better interest rates compared to stand-alone issues. Additionally, bond insurance will be obtained to ensure a rating of "AAA" and provide for the lowest possible cost of funds. The obligations will be secured solely by a pledge of gas tax revenues, or Prop. 42 funds, of the participating agencies. The programs will not require a pledge of a local agency’s General Fund.

According to the Surface Transportation Policy Project, the unfunded gap for street and highway maintenance projects is increasing by more than $400 million annually. Advancing gas tax and Prop. 42 funds for street and road improvements is one way for local agencies to meet this challenge and provide their constituents with services that improve their quality of life. These two programs will enable California local governments to complete larger projects (resulting in a more competitive bidding process), obtain more local match dollars to leverage available grant funding and, most importantly, improve the safety of local roads. Act now, before conditions get worse -- and far more expensive.